The home improvement superstore, Lowes, was a market darling earlier in the year. If you had jumped on LOW stock last Halloween, you could have scored almost a 50% gain.
But look at the chart over the last few months; it has given up ground. Sure it’s still up 30% or so, but over the last 3 months, investors in LOW have not been particularly happy.
But there is a way to profit from the malaise in LOW—with an Insurance Agent Trade using Call options. Normally I use the Insurance Agent Trade with Put options to profit from a flat or rising stock. You can see how I did that with Starbucks, for example, or with Costco. But with Call options traded above the stock price, I can profit from falling stock or even stagnant stock prices.
Here’s The Trade
On April 29, The Market Tamer Cash Flow System suggested that a Call credit spread on LOW would be profitable. With a Call spread above the stock price, you profit if the stock is flat or falls. And that’s exactly what LOW did.
I jumped on that trade on April 29, selling a Call credit spread for $.59. By the time the second week in June came around, I could buy the spread back for $.02. Total profit on the deal: about $1600.
I’ve been so pleased over the past few months that I’ve decided to make trades from the Cash Flow System a central part of my trading plan. I invite you to do the same.
If you’d like to learn more about it, you can get a dirt cheap trial. It comes with a wealth of trading education that is sure to make you a better trader.
It might be just what you’ve been looking for to get you more consistent profits that you’re looking for.
Steve Wynn is the CEO of Wynn Resorts (NASDAQ:WYNN). Over the course of his career, he and his various companies built such landmark Las Vegas hotels as Mirage, Treasure Island, Bellagio, Wynn, and others. Revenue for Wynn Resorts was over $5B, and Wynn’s personal net worth is over $4B.
Of course he is obviously successful and that success can be attributed to a number of characteristics. But the one key to his success and to his amassing a glittering $4B fortune is something that you can do too. His secret? He stacks the odds at his casinos in his favor.
It’s what casinos do. They create a game where there’s a chance that the player will win a bunch of money. But statistically, over time, the players will lose, and the casinos will win. If enough people play enough games, the people will lose and the casino and Steve Wynn will win.
Take roulette, as an example. In roulette, there are 36 red and black numbers around the roulette wheel. If you guess where the marble lands when the dealer spins the wheel, you will receive 36 times your wager. If you bet $10, you will walk away with $360. If you walk away. Chances are, you won’t. Steve knows that.
But there’s a problem. There are also two green numbers on the wheel. So the odds of the marble landing on 7 red are 1 in 38. And if it does land on 7 red, you get paid 36 times your money. So statistically, the casino will eventually win. For example, if customers make 380 bets of $10, chances are there will be 100 winners who will get a total of $3600. The casino will get the rest, $200. Every hour of every day, that table puts $200 in Steve Wynn’s pocket. He has a lot of tables.
“But what does this have to do with me?” I hear you ask.
If you have traded stock options, chances are you bought a long call option on a stock you thought would go up. If the stock went up quickly, you won. But if the stock went down or even if it went up a little, you lost.
But what if you could trade stock options like Steve Wynn, with the odds stacked in your favor.
What is this magic investment? It’s a stock option trading strategy called acredit spread. It is created by buying and selling related stock options in the same option expiration period.
What do the professional options traders do? They sell credit spreads. By being a net seller of options, you are feeding the cravings of the gamblers. The professionals trade “with the house” – with the odds in their favor.
If you trade like a business—like you are running a casino, instead of like the schmuck at the tables with a whiskey in one hand and a cigarette in the other—you will be a winner. Maybe not as rich as Steve Wynn, but you’ll be heading in the right direction.
There are many ways to trade stock options. Each type of options trade has pros and cons. But when all is said and done, the best trade in most cases is a credit spread. Now I can just hear haters jump up and down and criticize the credit spread because the risk/reward isn’t stellar. But “Haters gonna hate…” What is a credit spread? A trade that can have outstanding probability. And while you may not make a zillion dollars next week with a credit spread, odds are you will show a consistent profit. And that’s the name of the game. The credit spread is the best trade there is.
My favorite way to use a credit spread is what I call the Insurance Agent Trade. It goes like this. Suppose you have 100 shares of Amazon stock, and you’re a bit concerned to have $38,000 in one bucket, so you decide to buy some insurance. If you own a house, you buy homeowners insurance to protect your investment. If you own AMZN stock, you can also protect your investment
Since I am an insurance agent, I happily sell you some insurance. The insurance policy for stock is called a Put option. So you buy a Put option from me, your insurance agent. You decide you want a $2000 deductible insurance policy, so I sell you an Oct 360 Put option for $2500. By selling you that insurance, I have an obligation to buy your 100 shares of AMZN for $360, even if AMZN goes to zero. For you, the most you can possibly lose is $2000. Even if AMZN goes to zero, you can sell your shares to me for $360.
But I’m a little concerned that I might have to pay a bunch of money if AMZN goes way down, so I buy my own insurance. I buy an Oct 340 Put option that gives me the right to sell 100 shares of AMZN for $340. I pay $1800 for that insurance policy. The pair of option trades together is called a credit spread.
The net amount that I receive, the net credit, is $700 (2500-1800). How much can I lose? Well if AMZN goes to zero, I am obligated to buy your shares for $360/share, and I have the right to turn around and sell them for $340/share. I’ll lose $20/share or $2000. That’s the most that I could lose.
If I can potentially make $700 on a maximum risk of $2000, then the return on my risk is 35%. All I have to do is wait until the insurance policies (the pair of put options) expire in about eight months. That works out to about 5% per month. Not bad.
So that’s the Insurance Agent Trade: a Put credit spread placed well below the stock price with an expiration period of 60-90 days
As it turns out, I can usually exit this trade for almost all of the profit in perhaps six weeks. And as an added bonus, I will get all of my profit even if AMZN falls 5%.
Yes, you can make 5% per month with the Insurance Agent Trade, even if the stock that you are investing in falls.
Whenever you trade stock options, it is important to understand what are the rights and obligations of stock options. Whether you are trading call options or put options, the rights that you have and the obligations that you incur are the same.
Let’s look at a quick example. Suppose I think that Amazon stock is going up. If Amazon is currently trading at $350, and I think it is going to go to $375 by next month, I could buy a Call option. I could buy an April 360 Call option. Buying this Call options gives me the right to buy 100 shares of AMZN any time before late April for $360 per share, regardless of the market price of AMZN. If AMZN goes to $400, and I have the right to buy stock at $360, I can potentially make $40/share instantly. However, if AMZN falls to $350, owning the right to buy stock at $360 is of little value at all.
Suppose I bought this April 360 Call option from you. You sold it to me. By selling a Call option, you incur an obligation. You have the obligation to sell 100 shares of AMZN to me for $360 per share any time before late April. If AMZN falls to $350 per share, you know that I’m not going to ask you to sell me stock for $360. The option would be worthless. However, if the stock rises to $375, I’m going to ask you for 100 shares at $360. You have the obligation to sell them to me. It would be nice if you already own the stock so that you don’t have to go buy the stock for $375 in order to fulfill your obligation to sell it to me for $360.
Whenever you buy a call option, you have a right to buy stock at a certain price before the option expires.
Whenever you sell a call option, you have the obligation to sell stock at a certain price before the option expires.
Whenever you buy a put option, you have the right to sell stock at a certain price before the option expires.
Whenever you sell a put option, you have the obligation to buy stock at a certain price before the option expires.
A lot of politicians are patting themselves on the back these days for getting the US Unemployment figures down to 5.7%. And there’s no denying that that is a whole lot better than when unemployment was at its peak in 2009 at 10%. That represents millions of Americans are back at work. All good– right? Hmmm… not really. The oft-quoted “Official” unemployment rate of 5.7% is called the U-3 rate. It covers people without work who are seeking full-time employment. What about all of the people who were employed before the recession, but can’t find a job, or have settled for a part-time job to keep food on the table, or pick up hours contracting when they can find those temporary jobs. How do you count those people? Well, there’s the U-6 unemployment rate.
The U-6 unemployment rate is the more inclusive number. It includes the “marginally attached workers”, those who want to work but have given up. That number, the “real” unemployment rate is 11.3%.
But is that a lot? Of course the U-6 number would be larger than the U-3 number. There will always be people who have given up on a job or are marginally attached in some way. But the key for me is to look at a little history.
In January, 2007, the official (U-3) unemployment rate was 4.6%. At that time, the U-6 rate was 8.4, for a difference of 3.8 percentage points. In January 2015, the difference is 5.6 percentage points.
That says that even though the official rate has fallen from 10% at its height to within a point of its recent low, we still are leaving behind about 9 Million unemployed people who aren’t counted in the official U-3 unemployment rate.
A few thoughts.
I can’t help but think we’re pretty much lying about the unemployment rate. When we celebrate 5.7% unemployment, we’re saying, “Pay no attention to those 9 Million people behind the curtain.”
Obamacare with its incentive to hire temporary workers for 29 hours/week or less, is probably impacting the unemployment rate.
Few workers with full time jobs means fewer consumers spending money. With the US economy heavily dependent on consumer spending, unemployment is a continual drag.
Unemployment tends to keep inflation in check. With fewer consumers spending, the money flowing in the economy doesn’t have enough “velocity” to fuel significant inflation.
Hopefully the trend will continue, and the U-6 Unemployment rate – the real unemployment will continue to come down and more of us can get back to work.
Credit Spreadnoun: A structured stock option trade where one option is sold and another similar option in the same expiration period, further from the money is bought.
To understand what a credit spread is, let’s look at an example. With XYZ stock trading at 100, I sell a put option with a strike of 90 that expires in two months. At the same time, I buy a put option with a strike of 85 that expires at the same time.
For the 90 Put, I receive $10/share in premium. For the 85 Put, I have to pay $9/share. Then net result is for the pair of options, I receive $1/share. If I trade on pair of options, that controls 100 shares, so the net premium that I receive is $100.
If XYZ stock price stays above 90 for the next two months, both of those options will expire worthless. That $100 is mine to keep. If, on the other hand, XYZ plummets to 40, I will lose money on the 90 Put, but I will make money on the 85 Put that I bought. The net result will be that I will lose $5/share on the pair of options, but still get to keep the $1/share in net premium. So my maximum loss would be $400.
Chicago — FINRA, the Financial Industry Regulatory Authority, recently issued a new advisory on hammers. The Risk and Characteristics of Standardized Hammers was released today at the Chicago Building Operators and Equipment (CBOE). The 186-page document was created to advise consumers about the risks inherent in owning and using hammers.
Hardware stores will now be required to provide consumers with a statement of risk any time a hammer is sold. Copies of the full Hammer Disclosure Document must be available from any retailer of hammers. In addition, FINRA is requiring each hammer sold to have a label on it stating: “Hitting yourself in the head with this hammer may cause pain, injury, and even death.”
“Hammers are not suitable for some people. Infants, the elderly, and weak little girls should not use hammers. Hammer pounding should be left to professionals; it should not be attempted at home,” said Suzy A. Rod, Regulations Director for FINRA. “Anyone who wants to use a hammer should read the Hammer Disclosure Document in order to fully understand all of the risks.”
Home Depot (NYSE:HD) is on board with the new regulation. They have hired a hammer specialist at each of their 2300 retail stores including those in Canada and Mexico. Their job will be to provide the hammer education that consumers desperately need. “We want to be sure that this important information is available to everyone, including contingent workers preparing to come to the United States,” said a Home Depot spokesperson.
FINRA has long proclaimed that trading stock options is risky. They correctly point out that you can do stupid things with options and lose money. Today they are publicly pointing out that you can do stupid things with hammers.
Although I poke fun at the good folks from FINRA, there are risks in trading stock options. There are also risks in stocks, bonds, Treasury bills, and FDIC insured savings accounts. All investors should fully understand the risks before they make any investment.
Do you have your eye on a stock to invest in? Have you read the reports and listened to Cramer? Do you wish you could talk to some professional analysts who cover the stock and get great stock tips? And let them do all of the fundamental analysis?
What if you could find that group of analysts and hear what they have to say?
Well let me take you for a little trip… to the Yahoo Finance Analyst Cocktail Party. At this exclusive affair, you can wander from room to room and hear what the people in the know think about your stock.
Come on over here! I’m in the library, and there is a group of 38 experts on Amazon. If you ask them what they think AMZN will do in the coming year, you’ll find that on average, they think it will head up 90 points. There’s even one fellow who thinks it will hit 500!
Let’s stop in the conservatory. Look, there’s Miss Scarlett with a knife spreading some cheese on her crackers. The analysts over in the corner are talking about IBM. You ask what they think, and these experts give you a clue. They don’t think it has much hope of going up much at all.
In the living room, there’s a guy sitting in the corner talking to himself. He’s an analyst and a supposed expert on some stock, but if he’s there by himself and he’s not talking to a group, then I wonder if he’s a bit of a crackpot. I won’t pay much attention to what he says; he’s not validated by the crowd.
So how can you get an invite to this party? It’s easy. Just head over to the Yahoo Stock Screener. You can find groups of analyst with scores for any stock and sort them to find the best stocks to buy. You want to weed out tiny companies and those that are barely covered and focus on the companies being analyzed by a crowd.
I’ve made a video to show you exactly how I use the Yahoo Stock Screener to find great stock tips. Grab the free video. It’s quick and easy.
Once you drop in on a few analyst cocktail parties, you will be surprised how Yahoo Stock Screener can boost your investment returns.